Zain Saudi stake sale hit by due diligence delay

Dubai, June 13, 2011

Due diligence has yet to start on a $950 million stake sale in telecoms operator Zain Saudi, a spokesman for the seller said on Monday, throwing a cloud of uncertainty over the deal.

In March, parent Zain agreed to sell its quarter-stake in affiliate Zain Saudi to joint bidders Bahrain Telecommunications (Batelco) and Saudi billionaire Prince Alwaleed's Kingdom Holding, with the three parties signing terms in early April.

Prince Alwaleed said in April due diligence had started, but that was contradicted by Zain on Monday.

"Due diligence will commence if and when Zain Saudi's board of directors gives approval," said a spokesman for Zain.

Zain Saudi, Kingdom and Batelco were unavailable for comment.

Uncertainty has weighed on Zain Saudi's shares recently, which are languishing at five-week lows and are down 10.3 percent in 2011, underperforming the Saudi index.

"If I was a minority shareholder, I would want to know whether my status will be affected, but the main issue is the lack of transparency," said Martin Mabbutt, Nomura telecoms analyst. "We simply don't know the exact terms of the deal."

The stake sale hit a snag over management rights, a source told Reuters in May. Zain receives 2.7 percent of Zain Saudi's revenue in management and branding fees, according to a note from HSBC, with these worth an estimated 2.4 riyals per share. Zain Saudi does not want these fees transferred to Batelco, the source said.

"If Batelco and Zain Saudi are unable to find a solution over who gets management control, I would expect Batelco to withdraw from the bid," said Nadine Ghobrial, EFG-Hermes telecoms analyst.

Batelco also wants Zain to waive more than $100 million of accrued fees, plus $235 million in shareholder loans and interest charges, according to a note from Deutsche Bank. This would slash the deal's value to about $600 million, it said.

The prospective deal comes as Zain Saudi struggles to make up ground on its rivals. The firm has an estimated 16 percent share of Saudi Arabia's mobile market, placing it a distant third to rivals Saudi Telecom Co and Mobily.

"Zain Saudi is a latecomer to the market, which is already mature in terms of voice," said EFG's Ghobrial. "The longer negotiations take, the worse it is for the operations of Zain Saudi, which needs to spend on capital expenditure and step up its customer offers and marketing."